"Tax doesn't have to be taxing..." but we all know it is.
Whether it's complicated tax codes, nasty surprises at the end of the month, or many hours spent listening to that particularly tedious tune on the HMRC helpline, there are many reasons why we hate dealing with our tax. But there are a few things you can get your head round so that the whole thing doesn't make your head hurt and make you feel the need to lie in a darkened room for a few hours.
With that in mind, there are a few things you should understand about your tax code.
The amount of money you receive at the end of the month is dependent on what tax code HMRC has allocated to you, and that is dependent not only on what your salary is, but also on whether you have more than one job, other self-employed income, or what you paid (or didn't pay) last year.
People often raise queries about their pay when they do the simple calculation of 20% of an amount without realising that it's a little more complicated than that. You have to take into account your National Insurance contributions, your pension contributions, whether you meet certain thresholds, and whether your tax-free allowance has been allocated correctly. All things that make the whole thing a little more irritating.
So the basics of the tax code...
Normally, the number at the beginning of your tax code is the amount you can earn that isn't taxable divided by 10. So for example, if you only have one job (or pension) and you haven't got any other tax related benefits, you will be able to earn £12,500 before you have to pay tax. The code will be 1250L.
IMPORTANT NOTE: People assume that this means they won't pay tax until they earn more than that but that isn't the case. What actually happens is your employer tells HMRC what they think you're going to earn over the year and HMRC taxes you based on those assumptions. This means there will be tax deductions from day one so that the allowance nets out over the year.
Codes ending in M or N
The codes that end in M or N apply to people who have a Marriage Allowance. This is specifically the case where married individuals transfer a portion of their allowance to their partner. The recipient will receive an M tax code and the partner giving the allowance will have an N tax code.
The dreaded BR
BR stands for Basic Rate. This applies when all of your allowance has been allocated to another source of income meaning that you will automatically be taxed at the 20% rate. D is essentially BR but for higher tax rate earners. Everything earned under a D tax code will be taxed at 40%. Painful!
BR is often used as a default if HMRC has assumed you will utilise your tax free allowance elsewhere. As a result, this has been the cause of a many a tax refund.
K means something's gone wrong somewhere along the way and you still owe tax from the previous year. You may also get a K code if you have taxable benefits from an employer that isn't included on your payslip such as a car or a state pension.
N.B. There is a limit to the amount you can be taxed each month whilst HMRC is reclaiming tax from a previous period so they shouldn't decimate your earnings. It can't be more than half of your earnings each period, but it can still be painful so better just to get it right the first time!
Codes ending in W1 or M1
This is an emergency tax code. It is specifically for people who haven't got an accurate code when they start a role. It normally takes HMRC a month or two to iron out the mistakes in their coding so usually on a full-time role you won't be over taxed. This only becomes an issue if your on a short-term PAYE contract where HMRC doesn't have enough time to clarify the code and balance out your earnings.
That's not all...
There are some other codes out there that aren't described on the HMRC website, but the friendly people on the phone lines will be able to explain. An example of this is the code 400TX - When HMRC was asked what this meant, the response that came back was "it means we're confused." But luckily a bit of conversation was enough to get everything back on track.
The answers are out there.
If you are at all confused by your tax code you can log onto the HMRC tax code checker with either an account or a government gateway log in and make sure everything is where it should be.
You will then be able to give the helpline a call if you have any queries and they will be able to answer any questions.
The joyous tax refund!
You may be able to submit a form to request a tax refund if you think it is due, but it is worth speaking to HMRC directly before you do. What's more, they will often resolve the issue all by themselves.
***SPAM*** Make sure not to get too excited about the tax refund notices. They will send you a text and a letter. If it doesn't seem absolutely real, don't believe it.
When you owe more...
If you haven't paid enough tax, HMRC will make adjustments to your tax code to claim the money back from your salary up the £3,000. If there is still an amount due at the end of the tax year, you will then be required to pay a lump sum by the 31st of January the following year.